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Analysis on the downside pressure and structural adjustment of the Mainland economy

Recently, the Caixin manufacturing PMI hit a fresh new low and the industrial profits of enterprises above designated size recorded a notably decline, reiterating market concern over the slowdown of the Mainland economy. International organizations have already revised lower their forecasts on the Mainland economy for this year and the next. The OECD cited Mainland economic downturn to be a major risk factor for the global economy. The Managing Director of IMF, Ms. Lagarde, warned the emerging economies, such as Indonesia, to guard against the spillover effect from the Mainland economic slowdown. The international rating agency, Standard & Poor’s, even revised the Mainland’s banking sector outlook lower from stable to negative. If there is no improvement ahead, more negative actions by those international organizations are expected.

Looking at the source of downside pressure, the main cause of the economic slowdown rooted from the global financial crisis in 2008. Since then, the growth prospect of the Mainland has lowered by two major steps. The external demand shrunk rapidly after the global financial crisis, leading to a sharp contraction of Mainland’s exports. The Mainland GDP growth slowed remarkably from 14.2% in 2007 to 6.1% in Q1 2009. The economy then stabilized after the authorities implemented a massive RMB 4 trillion stimulus measures, but the average annual GDP growth only reached 9.6% between 2008 and 2011. Even though the GDP growth remained at a high pace, it has already slowed from the super-high growth between 2003 and 2007 (an average annual GDP growth of 11.6%), driven by the buoyant trade activities.

After the European debt crisis in 2012, the situation of insufficient external demand became more severe. Together with the correction of its real estate market, the pace of economic growth in the Mainland slowed further to an average annual rate of 7.6% between 2012 and 2014, entering into the range of mid to high speed growth under the new normal regime. In 1H 2015, the Mainland economy slowed further to 7%, amid negative exports growth and further deteriorating fixed assets investment. The economic performance in Q3 seems to be even weaker, raising question of whether the Mainland economy could achieve this year’s target of 7%.

Despite the intense downward pressure, the economic fundamentals of the Mainland remain largely intact. The series of stabilizing measures could help offset the downside risks of the Mainland economy, ensuring relatively stable growth and achieving the number one target under the new normal regime, i.e. maintaining mid to high speed growth.

1. Stable consumption growth is the major positive factor

Consumption is the main factor in determining the economic fundamental of the Mainland and also the precondition for stable growth. On one hand, consumption expenditure has long maintained relatively stable growth. It contributed an average of 4.4 percentage points, with a range of 3.6-5.6 percentage points, to the GDP growth between 2000 and 2014, obviously an important stabilizing force of economic development. In 1H 2015, consumption expenditure contributed 4.2 percentage points to GDP growth, slightly lower than the average since the beginning of this century. However, it was still somewhat higher than the 3.9 and 3.8 percentage points in 2013 and 2014 respectively, indicating the support from consumption not only did not weaken, but also strengthened further. On the other hand, consumption has outpaced investment to become the largest contributor to GDP growth. In 1H 2015, its contribution to GDP growth reached 60%, setting a new record for the past 15 years. As such, consumption becomes the number one driver and cornerstone of the Mainland economy to achieve a mid to high speed growth under the new normal regime.

However, is consumption growth sustainable? Based on the latest information, the answer is not pessimistic. For instance,

Firstly, the retail sector has maintained relatively fast growth recently. The total sales of consumer goods increased 10.5% and 10.8% in July and August respectively, higher than the 10.2% in Q2. Excluding the price effect, it remained 0.2 percentage point higher, indicating the consumer goods market was slightly better than expected and the future outlook will continue a steady and modestly upward trend.

Secondly, even though the non-manufacturing business activity index has been deteriorating, the consumption-related sectors, such as air transportation, postal and logistics, accommodation, telecom and internet etc, have continued to perform well, with their business activity indices all above the boom-bust dividing line, indicating the increasing role of consumer services in stabilizing growth. The recent stock market turmoil is not likely to have huge impact on service consumption.

Third, labour income and employment condition remained robust. In 1H 2015, the nationwide average disposable income increased 7.6% in real terms, persistently higher than the real GDP growth. Moreover, unemployment rate in 31 major cities stayed at around 5.1% and 7.18 million of new urban jobs were created, exceeding the government target. This indicated that service sectors have increasingly absorbed more labour force, offsetting the negative impact of the relocation of manufacturing facilities on the labour market and providing support for the relatively fast private consumption growth.

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Content provided by Bank of China (Hong Kong)
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